Tagged: Sukanya Samriddhi Scheme

NEW DELHI: The government on Friday announced a steep cut in interest rates on small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and Kisan Vikas Patras – which will fetch up to 90 basis points lower returns during the April-June quarter.

On January 14, TOI first reported that the government could reduce interest rates on small saving schemes but the extent of the reduction has taken everyone by surprise.

In case of PPF, the most popular scheme for middle-class savers, the reduction of 60 basis points (100 basis points equal a percentage point) is among the sharpest in nearly 15 years. Although the rates are to be reviewed every three months, if they remain unchanged during the next financial year, someone with Rs 5 lakh in his PPF account would face a hit of Rs 3,000 in 2016-17.

But the announcement has not gone down well with the middle class. Angry protests have begun on social media with PPF trending on Twitter. The government, however, claimed the changes were linked to the market rate, offering a parallel to global oil prices.

A reduction in rates on small savings is also bad news for those with large balance in fixed deposits, especially senior citizens, as banks are now expected to follow government action with similar cuts.

For long, banks and RBI had urged the government to reduce small savings rates to ensure that banks cut deposit rates. This, in turn, will pave the way for lower lending rates and translate into lower EMIs in the coming months, should the banks decide to pass on the benefit. However, given that a two-three year fixed deposit (FD) with SBI fetches the highest rate of 7.5% a year, savings in PPF still remain more attractive, especially with tax benefits thrown in.

Though pressure had been building for several months, the government opted for a change from April, which is the annual date for reset. “It’s normal practice for the last few years to change interest rates from April and we have followed that. The rates are linked to the yield on government securities and we have followed the same practice with a mark up for senior citizens, Sukanya Samridhi Scheme, PPF and NSC,” economic affairs secretary Shaktikanta Das told reporters.

The government provides an annual spread of a percentage point on Senior Citizen Savings Scheme, 75 basis points (bps) on Sukanya Samridhi Scheme and 25 bps on PPF, NSC, five-year post office deposit and Monthly Income Scheme. But post office savings deposits of one-three years, KVP and fiveyear Recurring Deposits will not longer get the benefit of a higher spread.

Das said the average yield on government bonds had come down from 8.5% in 2014-15 to 7.9% during the current financial year. “It (reduction) is being done to make the rates more market aligned. This will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates,” he told reporters but added that banks had to take a call on rates.

A sharp reduction in small savings rates have always been a ticklish issue politically with Yashwant Sinha facing severe criticism when he cut rates as finance minister in the Atal Bihari Vajpayee government.

Interest rates on small savings schemes, except the ones for the girl child and senior citizens, could be reduced by 25 to 50 basis points (bps) with effect from April 1.
By: FE Bureau | New Delhi | February 11, 2016 2:04 PM | Financial Express

Interest rates on small savings schemes, except the ones for the girl child and senior citizens, could be reduced by 25 to 50 basis points (bps) with effect from April 1. Henceforth, the interest rate would also be reset on a quarterly basis instead of annual basis. An official announcement in this regard is expected in a day or two.

Without mentioning how much the reduction would be in the interest rates, economic affairs secretary Shaktikanta Das on Thursday said the spread of 25 bps (above the average yield from government securities with similar maturity) available now for the small saving schemes below five years, would be reduced. “But for long term saving schemes of above five years, the spread will be protected because the government has taken into consideration the interest of the small savers and the need to encourage long term savings,” Das said. Even if the spread is maintained for long-term savings, the actual interest rate on these could come down a bit as yields on government securities have declined over the past year, analysts say.

Though small savings rate are usually determined to be 25 basis points above the average yield from government securities with similar maturity in the previous year, there have been three instruments that carry even higher rates: Sukanya Samriddhi Account, the Senior Citizens Savings Scheme and the National Small Saving Certificates (NSC). While the proposed changes won’t impact the high interest bearing schemes for the girl child and senior citizens, there could be some reduction in the NSC rates also.

Once these rates are announced, it is expected that bank deposit and lending rates to also fall. While the Reserve Bank of India has been cutting rates, banks have passed on less than half of the cuts on account of high rates on small savings schemes. Bankers say if they cut rates, much of their deposits would flow into small savings schemes.

For example, one-year postal deposit offers 8.4% where as State Bank of India offers 7.25% for deposits of the same tenure (7.5% for senior citizens). For the girl child’s welfare, the Sukanya Samriddhi Account Scheme offers 9.2% interest for a period up to 10 years while SBI offers only 7% on term deposits of 5-10 years (7.25% for senior citizens).

The cumulative corpus of National Small Savings Fund is projected to rise to Rs 9.59 lakh cr after accretion of Rs 52,000 cr in 2015-16.

Do-it-yourself tax planning can be rewarding and challenging. Rewarding, because you can choose the tax-saving instrument that best suits your needs. Challenging, because if you make the wrong choice, you are stuck with an unsuitable investment for at least 3-5 years. This is where our annual ranking of best tax-saving options can prove helpful. It assesses all the investment options on seven key parameters—returns, safety, flexibility, liquidity, costs, transparency and taxability of income. Each parameter is given equal weightage and a composite score is worked out for the various tax-saving options.

While the ranking is based on a robust methodology, your choice should also take into account your requirements and financial goals. We consider the pros and cons of each option and tell you which instrument is best suited for taxpayers in different situations and lifestages. We hope it will help you make an informed choice. Happy investing!

ELSS FUNDS
ELSS funds top our ranking because of their tremendous potential, high liquidity and transparency. The ELSS category has given average returns of 17.8% in the past 3 years. The 3-year lock-in period is the shortest for any Section 80C option.

If you have already fulfilled KYC requirements, you can invest online. Even if you are a new investor, fund houses facilitate the investment by picking up documents from your house and guiding you through the KYC screening. ELSS funds are equity schemes and carry the same market risk as any other diversified fund. Last year was not good for equities, and even top-rated ELSS funds lost money. However, the funds are miles ahead of PPF in 3- and 5-year returns.

The SIP route is the best way to contain the risk of investing in equity funds. However, with just three months left for the financial year to end, at best, a taxpayer will manage 2-3 SIPs before 31 March. Since valuations are not stretched right now, one can put in a bigger amount.SMART TIP
Opt for the direct plan. Returns are higher because charges are lower.

ULIP
The new online Ulips are ultra cheap, with some of them costing even less than direct mutual funds. They also offer greater flexibility. Unlike ELSS funds, where the investment cannot be touched for three years, Ulip investors can switch their corpus from equity to debt, and vice versa. What’s more, there is no tax implication of gains made from switching because insurance plans enjoy exemption under Section 10 (10d). Even so, only savvy investors who know how to use the switching facility should get in.SMART TIP
Opt for liquid or debt funds of the Ulip and gradually shift the money to the equity fund.

NPS
The last Budget made the NPS attractive as a tax-saving tool by offering an additional tax deduction of Rs 50,000. Also, pension fund managers have been allowed to invest in a larger basket of stocks.

Concerns remain about the cap on equity exposure. Besides, the taxability of the NPS on maturity is a sore point. At least 40% of the corpus must be put in an annuity. Right now, the income from annuities is taxed at the normal rate.SMART TIP
Opt for the auto choice where the equity exposure is linked to age and comes down as you grow older.

PPF AND VPF
It’s been almost four years since the PPF rate was linked to the benchmark bond yield. But bond yields have stayed buoyant and the PPF rate has not fallen. However, the government has indicated that it will review the interest rates on small savings schemes, including PPF and NSCs. If this is a worry, opt for the Voluntary Provident Fund. It offers that same interest rate and tax benefits as the EPF. There is no limit to how much you can invest in the VPF. The contribution gets deducted from the salary itself so the investor does not even feel it go.SMART TIP
Allocate 25% of your pay hike to VPF. You won’t notice the deduction.

SUKANYA SAMRIDDHI SCHEME
This scheme for the girl child is a great way to save tax. It is open only to girls below 10. If you have a daughter that old, the Sukanya Samriddhi Scheme is a better option than bank deposits, child plans and even the PPF account. Accounts can be opened in any post office or designated branches of PSU banks with a minimum Rs 1,000. The maximum investment in a financial year is Rs 1.5 lakh and deposits can be made for 14 years. The account matures when the girl turns 21, though up to 50% of the corpus can be withdrawn after she turns 18.SMART TIP
Instead of PPF, put money in the Sukanya scheme and earn 50 bps more.

SENIOR CITIZENS’ SCHEME This is the best tax-saving instrument for retirees. At 9.3%, it offers the highest interest rate among all Post Office schemes. The tenure is 5 years, extendable by 3 years. Interest is paid quarterly on fixed dates. However, there is a Rs 15 lakh overall investment limit.SMART TIP
If you want ot invest more than Rs 15 lakh, gift the amount to your spouse and invest in her name.

BANK FDS AND NSCs
Though bank FDs and NSCs offer assured returns, the interest earned on the deposits is fully taxable. They are best suited to taxpayers in the 10% bracket or senior citizens who have exhausted the Rs 15 lakh limit in the Senior Citizens’ Saving Scheme.SMART TIP
Invest in FDs and NSCs if you don’t have time to assess the other options and the deadline is near.

PENSION PLANS
Pension plans from insurance companies still have high charges which makes them poor investments. They also force the investor to put a larger portion (66%) of the corpus in an annuity. The prevailing annuity rates are not very attractive. Pension plans launched by mutual funds have lower charges, but are MFs disguised as pension plans. Moreover, they are debtoriented plans so they are not eligible for tax benefits that equity plans enjoy.SMART TIP
Invest in plans from mutual funds. They offer greater flexibility than those from life insurers.

INSURANCE POLICIES
Traditional life insurance policies remain the worst way to save tax. Still, millions of taxpayers buy these policies every year, lured by the “triple benefits” of life insurance cover, longterm savings and tax benefits. Actually, these policies give very little cover. A premium of Rs 20,000 a year will get you a cover of roughly Rs 2 lakh. The returns are very poor, barely 6% if you opt for a 20-year plan. And the tax-free income is a sham. Going by the indexation rule, if the returns are below the inflation rate, the income should anyway be tax free. The problem is that once you sign up for these policies, they become millstones around your neck.SMART TIP
If you can’t afford to pay the premium, turn your insurance plan into a paid-up policy.